Phoenix Group Holdings plc: 2022 Full Year Results

13 March 2023

Phoenix Group announces strong full year 2022 results and a 5% dividend increase

Commenting on the results, Phoenix Group CEO, Andy Briggs said:

"Phoenix has a simple strategy that is focused on the UK long-term savings and retirement market. We have continued to make excellent progress across all areas of that strategy in 2022, despite the challenging economic backdrop.

This has enabled us to deliver a strong set of financial results, with cash generation of £1.5 billion and our resilient balance sheet maintained. We have also grown our business both organically, with record new business growth of £1.2 billion, and inorganically, with the cash funded acquisition of Sun Life of Canada UK. Our strong strategic and financial performance has therefore enabled the Board to recommend a 5% dividend increase for the year.

At Phoenix, sustainability is embedded across our business and we are committed to putting the Planet and People at the heart of everything we do. If we are to live up to our purpose of helping people secure a life of possibilities, we need to play our part in tackling climate change and making retirement provision fit for the twenty first century. We have much more to do on both of these themes but the benefits of getting this right, both commercially and societally, are huge."

2022 financial highlights

Growing our dependable cash generation

·      £1,504m of cash generation¹ in 2022 (FY21: £1,717m), which exceeds our £1.3bn-to-£1.4bn target range for the year.

·     £12.1bn of Group in-force long-term free cash has increased by c.£0.3bn (FY21: £11.8bn) as our business grew year-on-year. This cash, which will be released over time, ensures our growing dividend is sustainable over the very long term.

Maintaining a resilient Solvency balance sheet

·     £4.4bn² Solvency II Surplus at 31 December 2022 (FY21: £5.3bn), with our comprehensive risk management approach limiting the Solvency II Surplus economic impact to £(0.4)bn, in line with our published sensitivities.

·    189% Solvency II Shareholder Capital Coverage Ratio^2,3 ('SCCR') (FY21: 180%³) is currently above our target range of 140-180%, providing significant capacity to invest into growth.

Delivering record organic growth

·     £1,233m of incremental new business long-term cash generation (FY21: £1,184m) comprises £934m from our Retirement Solutions business (FY21: £950m) and £299m from our capital-light fee-based businesses (FY21: £234m).

·    £4.8bn of BPA premiums (FY21: £5.6bn) which generated a broadly stable level of incremental new business long-term cash generation, but with 20% less capital invested; capital strain reduced further to 5.8%⁴ (FY21: 6.5%).

·   £2.4bn of Workplace net fund flows (FY21: £0.2bn) and 53% increase in incremental new business long-term cash generation to £212m (FY21: £139m), as we retain our existing clients and benefit from new joiners to existing schemes and increased member contributions.

Strong dividend growth in 2022

·      The Group's dividend policy is to 'pay a dividend that is sustainable and grows over time'.

·      5% increase in the Final 2022 dividend to 26.0 pence per share is recommended by the Board, comprising:

§ 2.5% organic dividend increase reflecting the Group's strong strategic and financial performance in 2022; and

§ 2.5% inorganic dividend increase that reflects the value from the Sun Life of Canada UK acquisition, which is expected to complete in April 2023 with regulatory approval now received.

·      50.8 pence per share Total 2022 dividend (FY21: 48.9 pence per share).

Other key financial metrics

·      Assets under administration of £259bn (FY21: £310bn) are lower primarily due to c.£46bn reduction in asset values.

·     IFRS adjusted operating profit of £1,245m (FY21: £1,230m); IFRS loss after tax of £(1,762)m reflects significant adverse investment variances due to the accounting volatility from our hedging approach and an accounting mismatch from our own pension schemes that have been subject to a buy-in (with an offset in Other Comprehensive Income).

·      30% Fitch leverage ratio⁵ (FY21: 28%) remains within our target range of 25-30%, despite the impact of IFRS volatility.

Clear progress made against our strategic priorities and our key ESG themes

Optimising our in-force business

·      £739m of Solvency II management actions delivered in 2022, primarily through BAU actions that included ongoing balance sheet efficiencies, further illiquid asset origination and optimisation of our liquid credit portfolio.

·     Our comprehensive risk management approach protected both our capital position and long-term cash, and we comfortably met all collateral calls on our hedging instruments during the economic turmoil in the second half of 2022.

·    £3.5bn of illiquid assets originated (FY21: £3.0bn), comprising £1.9bn of illiquid private debt and £1.6 billion of Equity Release Mortgages, demonstrating our enhanced asset management capabilities.

Growing organically and through M&A

·     Delivered sustainable organic growth through our Standard Life branded Retirement Solutions and Pensions and Savings businesses, reflecting the investment into our propositions.

·      Won 76 new Workplace schemes with an aggregate asset value of c.£2bn, that will transfer over the next 12-24 months.

·     Announced our first ever cash funded acquisition of Sun Life of Canada UK for £248m, which is expected to generate c.£470m⁶ of incremental long-term cash generation.

Enhancing our operating model and culture

·     Successfully migrated all c.400k annuities from Standard Life to the TCS BaNCS platform, and transferred c.1,200 customer service and IT colleagues to TCS Diligenta in line with our integration plan.

·     Completed the integration of the ReAssure Group Functions and announced in February the transfer of all c.3m policies from the Alpha platform to TCS BaNCS, delivering a further £180m of net cost synergies.

·   Improved diversity across the organisation, including gender balance achieved on our Group Board and Executive Committee.

·      Ongoing support for colleagues with the cost of living challenges, including a £1,000 net payment to our colleagues⁷.

Our strategic priorities are informed by, and in support of, our key ESG themes of: Planet and People

·      Planet - by transitioning our business to net zero, we aim to deliver better outcomes for our customers and play our part in tackling the climate emergency. Key achievements include:

o  c.£15bn of assets and c.1.5m members transitioned to Standard Life's Sustainable Multi-Asset default fund as we begin to decarbonise our investment portfolios at scale.

o  c.£340m of policyholder assets to be invested into an innovative multi-asset 'climate solutions' mandate as we maximise the opportunity of investing in climate solutions.

o   82% of key suppliers committed to setting science-based targets or Race to Zero based.

o   c.80% reduction in the carbon emission intensity of our own operations since 2019.

·     People - we want to help people live better longer lives. This means tackling the pension savings gap and supporting people to have better financial futures through promoting financial wellness and the role of good work and skills. Key achievements include:

o Our think tank, Phoenix Insights, published several insightful research reports raising awareness of under saving,  advocating for reform of the state pension, and contributing to the debate on economic inactivity.

o   c.1.2m customers offered the chance to review our digital literacy materials.

o   Improved average colleague engagement eNPS score of +30 (FY21: +23).

Key financial targets and guidance

·      Cash: 2023 cash generation target range of £1.3bn-£1.4bn; 3-year 2023-25 cash generation target of £4.1bn, which now includes future new business reflecting our confidence in delivering sustainable organic growth.

·      Resilience: continue to operate within our target ranges for our SCCR (140-180%) and Fitch leverage ratio (25-30%).

·    Organic growth: deliver further organic growth in 2023 as we progress towards our 2025 targets of c.£1.5bn of incremental new business long-term cash generation and c.£5bn of net fund flows in Workplace and c.£2bn in Retail.

·      M&A growth: complete the acquisition of Sun Life of Canada UK and continue to assess further M&A opportunities.

Enquiries

Investors/analysts:

Claire Hawkins, Director of Corporate Affairs & Investor Relations, Phoenix Group
+44 (0)20 4559 3161

Andrew Downey, Investor Relations Director, Phoenix Group
+44 (0)20 4559 3145

Media:

Douglas Campbell, Teneo
+44 (0)7753 136 628

Shellie Wells, Corporate Communications Director, Phoenix Group
+44 (0)20 4559 3031

Presentation and financial supplement details

There will be a live virtual presentation for analysts and investors today starting at 09:30 (GMT).

A link to the live webcast of the presentation, with the facility to raise questions, as well as a copy of the presentation and a detailed financial supplement will be available at:

https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations

You can also register for the live webcast at: Phoenix Group 2022 full year results

A replay of the presentation and transcript will also be available on our website following the event.

Dividend details

The recommended Final 2022 dividend of 26.0 pence per share is expected to be paid on 10 May 2023.

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 30 March 2023. The record date for eligibility for payment will be 31 March 2023.

Footnotes

1. Cash generation is a measure of cash and cash equivalents, remitted by Phoenix Group's operating subsidiaries to the holding companies and is available to cover dividends, debt interest, debt repayments and other items.

2. 31 December 2022 Solvency II capital position is an estimated position and reflects a dynamic recalculation of transitionals for the Group's Life companies and recognition of the foreseeable 2022 Final shareholder dividend of £260m. Had the dynamic recalculation not been assumed, the Solvency II surplus and the Shareholder Capital Coverage Ratio would increase by £0.1bn and 2% respectively.

3. The Shareholder Capital Coverage Ratio excludes Solvency II Own Funds and Solvency Capital Requirements of unsupported with-profit funds and unsupported pension schemes.

4. BPA capital strain is shown on a post Capital Management Policy (CMP) basis (on a pre-CMP basis it was 3.2%).

5. Current Fitch leverage ratio is estimated by management.

6.  As at announcement in August 2022.

7.  £1,000 net payment made in August 2022 to all permanent colleagues excluding our Top 100 leaders.

Legal Disclaimers

This announcement in relation to Phoenix Group Holdings plc and its subsidiaries (the 'Group') contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group's current plans, goals, ambitions, outlook, guidance and expectations relating to future financial condition, performance, results, strategy and/or objectives.

Statements containing the words: 'believes', 'intends', 'will', 'may', 'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward looking.  Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that the Group has estimated.

Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include, but are not limited to: domestic and global economic, political, social, environmental and business conditions; asset prices; market related risks such as fluctuations in investment yields, interest rates and exchange rates, the potential for a sustained low-interest rate or high-interest rate, environment, and the performance of financial or credit markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, initiatives related to the financial crisis, the COVID-19 pandemic, climate change and the effect of the UK's version of the "Solvency II" regulations on the Group's capital maintenance requirements; the impact of changing inflation rates (including high inflation) and/or deflation; the medium and long-term political, legal, social and economic effects of the COVID-19 pandemic and the UK's exit from the European Union; the direct and indirect consequences of the European and global macroeconomic conditions of the Russia-Ukraine War and related or other geopolitical conflicts; information technology or data security breaches (including the Group being subject to cyberattacks); the development of standards and interpretations including evolving practices in ESG and climate reporting with regard to the interpretation and application of accounting; the limitation of climate scenario analysis and the models that analyse them; lack of transparency and comparability of climate-related forward-looking methodologies; climate change and a transition to a low-carbon economy (including the risk that the Group may not achieve its targets); market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of proposed or future acquisitions, disposals or combinations within relevant industries; risks associated with arrangements with third parties; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; the impact of changes in capital, and implementing changes in IFRS 17 or any other regulatory solvency and/or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals, ambitions, outlook, guidance and expectations set out in the forward-looking statements and other financial and/or statistical data within this announcement. The Group undertakes no obligation to update any of the forward-looking statements or data contained within this announcement or any other forward-looking statements or data it may make or publish.  Nothing in this announcement constitutes, nor should it be construed as, a profit forecast or estimate.

Chair's statement

A truly purpose-led business

"Phoenix is fully embracing its purpose as we help more people on their journey to and through retirement, while delivering better outcomes for all of our stakeholders."

Alastair Barbour, Chair

I am delighted to report that 2022 has been another year in which Phoenix Group has delivered both clear strategic progress and strong financial performance.

During the year, Phoenix Group has once again continued to produce the high levels of predictable cash generation it has always been known for and maintained its resilient balance sheet despite the economic turbulence. The Group has also delivered strong organic growth through our Standard Life branded businesses and M&A growth with the announcement of our first ever cash-funded acquisition of SLF of Canada UK Limited ('Sun Life of Canada UK'). All of which has enabled the Board to recommend a dividend increase of 5% for 2022.

At the Group's Capital Markets Event in December 2022 the executive team detailed their clear strategy to meet more of the needs of our existing customers and to attract new customers, enabling us to continue delivering cash, resilience and growth going forward. The Group also set its first ever organic growth target, which reflects both the Board and executive team's confidence in Phoenix Group's future growth prospects, despite the challenging economic outlook for 2023.

I am proud to see that the journey Phoenix Group has been on during the ten years I have served on its Board is delivering such clear value to our customers, colleagues, shareholders and wider society, as we fully embrace our purpose of 'helping people secure a life of possibilities'.

Our purpose drives all that we do

As the UK's largest long-term savings and retirement business, managing £259 billion of assets on behalf of our c.12 million customers, we have the responsibility and opportunity to make a real difference to our customers and to help drive a low carbon, fair and more secure future. That is why we are fully embedding ESG considerations across our business. Our strategic priorities are therefore informed by, and in support of, the key ESG themes where we can make the most difference, to both the planet, and to people.

If we are really going to help people secure a life of possibilities, we need to play our part in tackling the climate crisis affecting our planet. This means managing the financial risks that climate change poses to our customers, as well as maximising the opportunities it creates. We will do this by transitioning our business to net zero. And by being a leading voice, in calling for action, and driving system change.

We have therefore set clear targets for our journey to net zero across our investment portfolio, supply chain and operations, and with an estimated 24 million tonnes of CO2 emissions from our investment portfolio, we really can make a difference.

We are taking an active approach to protecting our customers, by decarbonising our portfolios at scale, and through stewardship engagement. We also want to take advantage of the substantial investment opportunities, that moving to a green economy presents, such as renewable energy and sustainable transport. A great example of which is the £330m of policyholders assets we have invested into an innovative multi-asset 'climate solutions' mandate.

I am also delighted with the progress we are making to decarbonise our supply chain and operations, with 82% of our suppliers committed to science-based or Race to Zero based targets, and an 80% reduction in the emissions intensity of our own operations since 2019.

Our second key theme is focused on people, through promoting financial wellness and the role of good work and skills. We are facing a growing pension savings gap, with research from our think tank, Phoenix Insights, revealing that only 14% of defined contribution pension savers are on track for a retirement income that maintains their current standard of living. Engaging people in their financial futures, and advocating for broader societal action to tackle under-saving, is a critical part of our commitment to our purpose. Phoenix is supporting better financial futures by meeting more of our customers' evolving needs on their journey to and through retirement, through our range of innovative products and services.

However, for people to have better, longer lives they also need access to good work and opportunities to upskill throughout their careers, increasing their incomes and ability to save for retirement. Phoenix Insights advocates for change in working practices, careers advice and lifelong learning, as explained in more detail on pages 24-25. And as an employer, Phoenix is committed to being an exemplar inclusive, age-friendly workplace.

Supporting our colleagues

We also have a broader role to play in society and against the backdrop of economic uncertainty, a key issue over the past year has been the Cost of Living Crisis. The Board has therefore been focused on ensuring our colleagues are supported throughout. Central to this has been a wide-ranging support package to help colleagues navigate the cost of living challenges, which included giving all colleagues, except our most senior staff, a net £1,000 payment in August 2022.

Shareholder dividend increase

The Group has a clear dividend policy which is to pay a dividend that is sustainable and grows over time, with the Board prioritising the Group's long-term dividend sustainability at all times.

I am delighted to announce that the Board is recommending a 5% increase in the Group's 2022 Final dividend to 26.0 pence per share, meaning the Group's Total dividend for 2022 will be 50.8 pence per share. This reflects the Group's strong performance across a range of strategic and financial performance measures. It comprises a 2.5% organic dividend increase, and a 2.5% inorganic increase, reflecting the value from the acquisition of Sun Life of Canada UK.

Going forward, we expect the business to continue growing organically and we also remain committed to M&A. This in turn is expected to support a dividend that is sustainable and grows over time.

Board changes

I am delighted to be fulfilling the role of Chair while Nicholas Lyons is on a 14-month sabbatical, which is enabling him to undertake the role of Lord Mayor of the City of London. Nicholas has resigned from the Board on a temporary basis for his sabbatical, but remains in contact with myself and our CEO, Andy Briggs, so that he can seamlessly resume his role as Chair from November 2023. In line with good corporate governance as it relates to the independence of Non-Executive Directors, having served ten years on the Phoenix Group Board, I will sadly be leaving the Board when Nicholas returns in November.

Elsewhere, during 2022 the Board was delighted to welcome Katie Murray as an independent Non-Executive Director and Chair of the Board Audit Committee, and Maggie Semple as an independent Non-Executive Director and the Group's Designated Non-Executive Director for Workforce Engagement. Katie and Maggie have brought a diversity of experience and new perspectives, and both are already making valuable contributions. We also wished Wendy Mayall a fond farewell, as she retired from the Board in 2022, after diligently serving two three year terms and supporting us in navigating a number of key strategic initiatives during her time.

Outlook

As we enter a challenging economic environment in 2023, the Board and I are confident that Phoenix's business model and risk management approach will ensure that we remain highly resilient to any economic volatility. While our strategy will support us in delivering future growth, as we meet more of the needs of our existing customers and acquire new customers.

Thank you

Finally, I would like to take the opportunity to thank the Board, our colleagues, our partners and all of our wider stakeholders for their hard work and dedication in delivering what has been another successful year for Phoenix Group.

Alastair Barbour

Phoenix Group Chair

Group Chief Executive Officer's report

Phoenix is delivering sustainable growth

"2022 has seen us execute against all of our strategic priorities as we delivered both organic and M&A growth, which demonstrates that Phoenix is truly a growing business."

Andy Briggs, Group Chief Executive Officer

2022 has been a strong year of delivery for Phoenix Group, despite the challenging economic environment. As we have made significant progress against our strategic priorities during the year by continuing to embrace our purpose. This has supported us in delivering a strong set of financial results, in line with our financial framework of Cash, Resilience and Growth.

Delivering Cash, Resilience and Growth supports an increased dividend

During 2022, our in-force business delivered cash generation of £1.5 billion, exceeding our 2021 target range of £1.3-to-£1.4 billion. Our resilient Solvency II ('SII') capital position was maintained with a SII Surplus of £4.4 billion (2021: £5.3 billion) and an increased Shareholder Capital Coverage Ratio ('SCCR') of 189% (2021: 180%), which is currently above our target range of 140-180%, providing capacity for us to invest into growth.

I am delighted we have delivered a second consecutive year of organic growth with record incremental new business long-term cash generation of £1,233 million (2021: £1,184 million). This means that we have once again more than offset the run-off of our in-force business and firmly established Phoenix as a business that is growing and sustainable. We are now confident of growing our incremental new business long-term cash generation going forward and have set a target of c.£1.5 billion per annum by 2025, which is the first organic growth target we have ever set, which is a clear signal of our ambition.

We have also delivered M&A growth in 2022, with the announcement of our cash funded acquisition of Sun Life of Canada UK. This is expected to complete in April 2023, with the key regulatory approvals now received. The significant value that will be generated by this transaction has enabled the Board to recommend a 2.5% inorganic dividend increase this year, which demonstrates the significant value to shareholders of smaller, cash funded M&A.

As a result of our strong overall performance, I am pleased that the Board is recommending a dividend increase of 5%, in line with our dividend policy. This reflects the Board's determination to reward our shareholders when our business performs well.

The sustainability of this increased level of dividend is underpinned by the £0.3 billion increase in our Group in-force long-term free cash to £12.1 billion (2021: £11.8 billion). This is the cash that will emerge from our in-force business and will be available to our shareholders over time. It ensures our increased level of dividend remains just as sustainable over the very long term.

In terms of our IFRS reporting, we have reported an increased adjusted operating profit of £1,245m for the year (2021: £1,230m), but the impact of our hedging approach results in an IFRS loss after tax of £(1,762)m (2021: £(709)m). As a reminder, we hedge our Solvency balance sheet with the aim of delivering resilient cash generation over the long term, but this does create IFRS accounting volatility. This impact has been accentuated by the significant increase in yields last year, driving the large accounting loss, but this does not impact our cash generation or dividend capacity in any way.

Executing on our clear strategy

Phoenix's role in society is to help our customers journey to and through retirement by meeting their evolving needs.

Phoenix has a clear and differentiated strategy as outlined on pages 14-15, which is in support of our purpose of helping people secure a life of possibilities.

Our strategy is simple. We are the experts in optimising a scale in-force business for cash and resilience, and we grow this both organically and through M&A.

Our in-force business is the £259 billion of assets we look after for our c.12 million existing customers. It is highly cash generative, and provides surplus cash, that we can reinvest into growth.

Organic growth comes from meeting more of our existing customers' needs as they save for, transition to, and secure an income in retirement. We also acquire new customers, who we can then help through their life cycles.

In addition, we have attractive M&A growth opportunities, where we acquire new customers at scale and deliver better outcomes for customers with legacy products. In the process, we transform the acquired businesses, to deliver significant cost and capital synergies.

But what's particularly attractive about our business model, is that the whole really is more than the sum of the parts. With our organic and M&A growth generating more in-force business, that we then optimise.

We are confident of delivering our strategy because our scale in-force gives us three unique competitive advantages.

The first is capital efficiency, where we get greater diversification from the breadth of in-force products across our £259 billion of customer assets. We are also highly resilient, through our core capabilities in risk management and capital optimisation.

Secondly, with c.12 million customers we have an unrivalled level of customer access, with around 1-in-5 UK adults being a Phoenix Group customer. This provides us with deep customer insights and clear growth opportunities as we look to meet more of their evolving needs over time.

And thirdly, we have a significant cost efficiency advantage. This is enabled through our customer administration and IT partnership with Tata Consultancy Services ('TCS'), and our focus on delivering a simplified operating model.

Our in-force business therefore gives us real competitive advantages, that are very hard to replicate. Which means we are confident that we can, and will, win in our chosen markets.

All of which provides us with the opportunity to drive both organic and M&A growth through meeting our customers' needs, as outlined in the spotlight box to the left.

Delivering our strategic priorities

Our strategy is delivered on a day-to-day basis through our three strategic priorities, which cover the investments and the programmes of work, that will further enhance our competitive advantages, and enable us to help people secure a life of possibilities. Our progress this year against each of these priorities is outlined below.

Optimise our in-force business

Our first strategic priority is all about leveraging our scale in-force business to deliver capital efficiency and better returns on our capital, with a strong 2022 performance across our key areas of focus.

Delivering cost and capital synergies, which we refer to as 'management actions', remains a core capability of Phoenix. In 2022, we have once again delivered a significant level of management actions, with £739 million of actions achieved. This was primarily from business-as-usual management actions, which are not reliant on cost and capital synergies from M&A transactions, and are therefore sustainable over the long term. This included the ongoing delivery of a range of balance sheet efficiencies, which remains a differentiating capability for us, as well as further illiquid asset origination and optimisation of our liquid credit portfolio.

Our comprehensive risk management framework includes our hedging approach, which differentiates us from other insurance companies. We hedge the vast majority of the market risks we are exposed to including equities, interest rates, inflation and currency, to minimise volatility in our capital position during volatile economic periods. We also operate a conservative credit portfolio to manage our exposure to credit risk. This approach enabled us to limit our SII surplus economic variance to £(0.4) billion during a volatile economic environment.

We have also continued to enhance our asset management capabilities, to support our growth ambitions and efficiently oversee the management of our customer assets, and continued to expand our range of asset management partners to 21, as we seek to diversify our portfolio globally.

Investing in a sustainable future is the first key pillar of our sustainability strategy and we have continued our investment into sustainable assets with c.£1 billion invested to support affordable housing, access to healthcare, and projects with a positive environmental or social impact.

Last year we also started to integrate decarbonisation strategies into our listed equity portfolios and we are now in the process of designing decarbonising equity benchmarks for UK and US listed equity exposures. This will help manage our customers' exposure to climate risk and reduce the carbon intensity of our investment portfolio.

I am also delighted that the work Phoenix and our peers have done to influence the SII reform proposals means the insurance industry should be better placed to help accelerate the path to net zero by investing to develop a low carbon economy.

Grow organically and through M&A

Our second strategic priority is focused on meeting more of our existing customer needs and acquiring new customers, with a significant year of achievements in 2022.

Our Retirement Solutions business had another strong year. Our focus on improving our capital efficiency in the Bulk Purchase Annuity ('BPA') business enabled us to generate a broadly similar amount of incremental new business long-term cash generation with less capital invested. This in turn enabled us to deliver an improved mid-teens IRR. It was also great to see the success of our launch of the Standard Life Home Finance products and the ongoing development of our open market annuity product, supporting a launch in 2023.

I am also delighted that the significant progress we have made in developing our Workplace proposition and the investment we have made into the Standard Life brand is delivering improved performance. We achieved net flows of £2.4 billion, as we retained our existing schemes and saw new members join our existing schemes. This supported us in delivering a c.50% annual increase in new business long-term cash generation. We also won 76 new schemes across all parts of the market including small, medium and large schemes.

Elsewhere, our other fee-based businesses (Retail, Europe and SunLife) remained resilient during the year.

We are also growing through M&A, having announced our first ever cash-funded acquisition, of Sun Life of Canada UK for consideration of £248 million. This transaction, which is due to complete in April 2023, is expected to deliver c.£0.5 billion of incremental long-term cash generation. This transaction also benefits from a simplified operational integration programme, as the majority of their policy administration is already being outsourced to our strategic partner (TCS Diligenta).

Engaging people in better financial futures is the second key pillar of our sustainability strategy and we have continued to make great progress here. In 2022, we transitioned c.1.5 million customers and c.£15 billion of assets from our existing default funds to our flagship Sustainable Multi-Asset default fund, as we seek to support our customers in investing their pension assets sustainably.

We also continued to use our influence on behalf of our customers and colleagues. As the UK Government's Business Champion for Ageing Society, I am passionate about encouraging older workers to stay in work or come back to work. Good examples of Phoenix leading in this area were our high-profile initiative to make our job adverts age neutral and the Phoenix Insights 'The Great Retirement' report which identified some of the key factors driving rising levels of economic inactivity among the over 50s in the UK.

Enhance our operating model and culture

Our third strategic priority is focused on delivering leading cost efficiency and a modern organisation.

We continued to make great progress with our integration work, with the migration of c.400,000 Standard Life annuities to the TCS BaNCS platform and we transferred the custody and fund accounting services for £90 billion of assets to HSBC.

We have also recently announced the extension of our partnership with TCS, as we plan to move all c.3 million ReAssure policies from our Alpha platform to the TCS BaNCS platform by 2026. This will enable our customers to benefit from the clear digital focus, consistent customer journeys and proposition provided by the BaNCS platform. It is also fully aligned with our model of enhancing long-term cost efficiency, with a further c.£180 million of ReAssure net cost synergies expected.

As ever, we remain focused on attracting, developing and retaining the best talent to drive our business forward. With a range of initiatives in the year that has supported an increase in our colleague engagement eNPS score to +30 (2021: +23). It is also pleasing to see that we have balanced female representation on our Group Board and Executive Committee, in line with our diversity and inclusion goals.

Leading as a responsible business is the third key pillar of our sustainability strategy. Here we are committed to adopting the highest sustainability standards across our business and will lead by example for the stakeholders we engage with to drive real world change and deliver positive impact We are committed to being net zero in our own operations by 2025, which we remain on track to achieve, with an 80% reduction in emissions intensity across our own operations since 2019.

We are also leading the industry with our approach to our supply chain, where we have set our pathway to decarbonisation and launched stretching new ESG supply chain standards for our partners.

Outlook

Looking forward, it is clear that 2023 will present a challenging economic backdrop. However, our business model is designed to be resilient throughout the economic cycle. Our comprehensive hedging approach is designed to protect our Solvency capital position from the majority of the market risks we are exposed, while the key areas of structural market growth we are focused on remain attractive.

In particular, we expect to see a strong year of volumes in the BPA market during 2023, with the recent yields increase having improved the funding positions of many schemes, driving increased demand.

Workplace is also a very resilient business during an economic downturn, with pension contributions being deducted direct from salaries by employers, leading to stable flows through economic cycles.

Finally, there remains c.£470 billion of UK Heritage assets that we believe could come to market over time and we expect further opportunities for M&A consolidation due to the impact of cost inflation on backbook portfolios.

All of which means we expect to see continued organic and M&A growth, to support us in delivering Cash, Resilience and Growth, enabling us to pay a dividend that is sustainable and grows over time.

We are confident in our future growth as demonstrated by setting our first ever organic growth target of c.£1.5 billion of incremental new business long-term cash generation by 2025.

Thank you

The progress we have made this year is all down to our exceptional people and I would like to thank my colleagues throughout the Group for their continued contribution and dedication in 2022.

Andy Briggs

Group Chief Executive Officer

Business review

Delivering cash, resilience and growth

"The strong strategic progress we have made during 2022 has enabled us to continue delivering on our financial framework and to recommend a 5% dividend increase for the year."

Rakesh Thakrar, Group Chief Financial Officer

A strong financial performance in 2022

I am delighted that we have once again delivered a year of strong financial performance, as we execute on our strategy and fulfil our purpose.

We have delivered another year of resilient cash generation, with £1.5 billion generated in 2022, exceeding our target range of £1.3-to-£1.4 billion for the year.

We have also maintained our resilient capital position with a Solvency II ('SII') surplus of £4.4 billion and a SCCR of 189%, which is above our target ratio range of 140% to 180%.

In terms of new business growth, we have delivered record incremental new business long-term cash generation of £1,233 million. This means that for the second consecutive year we have more than offset the run-off of our in-force business.

We have also grown inorganically through M&A, having announced our first ever cash funded acquisition of Sun Life of Canada UK, which we expect to complete in April.

Our strong strategic and financial performance this year has therefore enabled the Board to recommend a dividend increase of 5% for the year.

With £0.3 billion growth in our Group in-force long-term free cash to £12.1 billion, our increased level of dividend remains every bit as sustainable over the very long term. With this increased long-term free cash, which will be available to shareholders over time, proof that Phoenix is a sustainable, growing business.

In terms of our IFRS reporting, the Group's adjusted operating profit remained strong at £1,245 million, but we have reported an IFRS loss after tax of £(1,762) million. This primarily reflects £(2,673) million of adverse investment return variances from accounting volatility in relation to our hedging instruments and includes economic movements on assets within our corporate pension schemes that have been subject to a buy-in. Taking into account the corresponding decrease in our pension scheme liabilities of £940 million, Total Comprehensive Expense for the year was £(1,076) million. This impact has, in turn, increased our Fitch leverage ratio to 30%, which remains within our target operating range of 25-30%.

As a reminder, our hedging approach is designed to stabilise our SII Surplus and Group in-force long-term free cash, which in turn protects our dividend paying capacity. However, this does cause significant IFRS volatility due to a mismatch between our IFRS balance sheet, and the Solvency balance sheet that we are hedging (see page 31 for more detail). However, we accept this as the trade-off to deliver the resilient cash generation and dividend we are known for.

I am proud of the strategic progress we have made this year, particularly in driving forward our organic growth strategy. At our Capital Markets Event in December we outlined the journey we have been on and our future ambitions.

In Retirement Solutions, we have now firmly established ourself as a key player in the BPA market, with another really successful year of growing our BPA business.

We have also been focused on cultivating our fee-based businesses, to develop more balanced organic growth, in particular in our Pensions and Savings business. I am therefore delighted to see the progress we are making in our Workplace business, where we have seen a renewed trust in our proposition, enabling us to both retain our existing schemes and attract new clients.

Our confidence in our future organic growth strategy has enabled us to set our first ever incremental new business long-term cash generation target, of c.£1.5 billion per annum by 2025.

So looking back on 2022, it has been a year of clear strategic progress, that supported us to deliver a strong set of financial results. Importantly, our business is growing, as demonstrated by the growth in our Group in-force long-term free cash to £12.1 billion, which sustains our increased dividend over the very long term. Our Solvency capital position also remains highly resilient, despite the unprecedented economic volatility last year, with our SCCR of 189%. This supports provides us with significant capacity to invest into growth.

This is Phoenix's financial framework in action, as we deliver resilient and predictable cash generation, which underpins a dividend that is sustainable and grows over time.

Cash

Cash generation

Operating companies' cash generation represents cash remitted by the Group's operating companies to the holding companies. Please see the APM section on page 314 for further details of this measure.

Cash generation from the operating companies' is principally used to fund the Group's shareholder dividends, debt interest and repayments, and its various operating costs. Any surplus remaining is available for reinvestment into organic and M&A growth opportunities.

The cash flow analysis that follows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of those cash receipts.

Group cash flow analysis

1  Total cash receipts include £55 million received by the holding companies in respect of tax losses surrendered (2021: £95 million).

Cash receipts

Cash generated by the operating companies during 2022 was £1,504 million (2021: £1,717 million). This exceeded the Group's target range of £1.3-to-£1.4 billion for the year.

Uses of cash

Operating expenses of £78 million (2021: £80 million) represent corporate office costs, net of income earned on holding company cash and investment balances.

Pension scheme contributions of £16 million were made in 2022 (2021: £11 million) with the increase on 2021 due to the inclusion of a £5 million contribution into the ReAssure pension scheme following a triennial review.

Debt interest of £244 million (2021: £250 million) reflects interest paid in the period on the Group's debt instruments. The small decrease year-on-year is due to the repayment of debt in June 2022 and elimination of interest thereon.

Non-operating cash outflows of £395 million (2021: £305 million) primarily comprises centrally funded projects and investments. £90 million relates to Group project expenses for the transition activity in relation to the Standard Life platform migration, £40 million for other ongoing integration programmes including ReAssure, and £33 million for our Finance Transformation including implementing the new IFRS 17 accounting standard.

We also incurred £15 million of costs related to our cost of living colleague support, £12 million of acquisition costs related to the Sun Life of Canada UK transaction, and made a £15 million equity investment into the open finance platform Moneyhub.

There was also a further £77 million of other project costs, £68 million from the close-outs in respect of Group hedging instruments and £45 million of other items.

Debt repayments

Debt repayments in 2022 reflect the repayment of the £450 million Tier 3 subordinated bond in July (2021: £322 million), as the Group manages its leverage.

Shareholder dividend

The shareholder dividend of £496 million represents the payment of £248 million in May for the 2021 final dividend and the payment of the 2022 interim dividend of £248 million in September.

Support of BPA activity

Funding of £285 million (2021: £359 million) has been provided to the life companies to support a strong year in BPA with £4.8 billion of premiums written (2021: £5.6 billion).

The decrease relative to 2021 reflects the Group's success in optimising its capital with a reduction in the Group's capital strain on BPAs to 5.8% in 2022 (2021: 6.5%). This enabled the Group to write a similar amount of incremental new business long-term cash generation, but with 20% less capital invested.

Future cash targets set

Our business model is designed to deliver high levels of predictable cash generation, enabling us to set very clear targets. We are therefore setting a one-year target of £1.3 to £1.4 billion again in 2023.

We have also set an increased three-year cash generation target of £4.1 billion for 2023-2025. This includes £0.1 billion of expected cash emergence from the Sun Life of Canada UK acquisition and, for the first time, cash emergence from new business we expect to write in 2023 and 2024 of £0.2 billion.

Future sources and uses of cash

Looking over the period 2023-2025, and after we have invested £248 million to fund the acquisition of Sun Life of Canada UK, we expect to have surplus cash of around £1.45 billion available to invest into growth.

We will therefore continue to invest into organic growth through BPA and our fee-based businesses, and will also continue to assess further M&A opportunities.

Group in-force long-term free cash

Group in-force Long-Term Free Cash ('LTFC') represents the cash expected to be available over time to fund future dividends from today's in-force business. This underpins the sustainability of our c.£0.5 billion annual dividend cost over the very long term.

Group in-force LTFC was £12.1 billion as at 31 December 2022 (2021: £11.8 billion). It comprises long-term cash generation expected to emerge from our in-force business plus existing Group holding company cash, less an allowance for costs associated with our M&A integration activity and a deduction for our shareholder debt outstanding and interest to maturity.

Growing our Group in-force LTFC allows us to demonstrate that we are a growing, sustainable business. I am therefore pleased that in 2022 we have increased our Group in-force LTFC by c.£0.3 billion.

The movement in the year is driven by c.£1.2 billion of incremental new business long-term cash generation written in 2022 from organic growth and c.£0.3 billion of value-creating Solvency II own funds management actions.

This more than offsets the Group's c.£0.8 billion of annual operating costs, debt interest and dividends, c.£0.3 billion of capital invested into BPA in 2022, and c.£0.1 billion of net other uses of cash.

Growth in the Group's in-force LTFC supports us in delivering a dividend that is sustainable and grows over time.

Group in-force long-term free cash

Resilience

Capital management

A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR').

The Group's Own Funds differ materially from the Group's IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profit funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities, taxation and intangible assets.

Group Solvency II capital position

Our Solvency II capital position remains strong, with a resilient surplus of £4.4 billion (2021: £5.3 billion), which includes the accrual for the deduction of our 2022 final dividend of £260 million. Our Shareholder Capital Coverage Ratio ('SCCR') increased to 189% (2021: 180%). This is currently above the top-end of our 140%-to-180% target range, providing the capacity to invest into both organic and M&A growth opportunities.

Change in Group Solvency II surplus and SCCR

Our ongoing surplus emergence and release of capital requirement increased the SII surplus by £0.7 billion during the year, contributing to an increase in the SCCR of 16%pts.

We delivered strong management actions in the period, primarily from 'business as usual' actions as we continue to optimise our in-force business. Management actions contributed a further £0.7 billion of surplus increase and added 7%pts to the SCCR.

Operating costs, dividends and interest totalled £(0.8) billion, reducing the SCCR by 16%pts. We also repaid a c.£0.5 billion Tier 3 bond from our own cash resources in July 2022, reducing the SCCR by 9%pts.

As a result of our comprehensive hedging strategy, designed to stabilise our capital position, we have minimised the adverse impact from economic variances to just a £(0.4) billion impact on our Solvency II surplus, despite unprecedented market turbulence last year. While this surplus movement from economics was relatively small, a consequence of our hedging approach is that we do see volatility in the Group's Own Funds, to offset against movements in the SCR, and this led to an 18%pts increase in the SCCR.

Importantly though, both the SII Surplus and SCCR impacts were broadly in line with our published sensitivities, which means our hedging operated as we expected it to.

We also invested £0.3 billion of capital into growth, primarily for the funding of £4.8 billion of BPA premiums written in the year, which decreased the SCCR by 7%pts.

Other movements represent project spend to deliver Group initiatives, and a strengthening of expense assumptions for the IFRS 17 project and integration delivery. These movements decreased Solvency II surplus by £0.3 billion, but had a neutral impact on the SCCR, due to other assumption changes providing an offset.

Sensitivity and scenario analysis

As part of the Group's internal risk management processes, the Own Funds and regulatory SCR are regularly tested against a number of financial scenarios. The table provides illustrative impacts of changing one assumption while keeping others unchanged and reflects the business mix at the balance sheet date. Extreme markets movements outside of these sensitivities may not be linear.

While there is no value captured in the Group stress scenarios for recovery management actions, the Group does proactively manage its risk exposure. Therefore in the event of a stress, we would expect to recover some of the loss reflected in the stress impacts shown.

Illustrative risk exposure stress testing

1  Illustrative impacts as at 1 January 2022 assume changing one assumption while keeping others unchanged, and reflects the business mix at the balance sheet date, and that there is no market recovery. Extreme markets movements outside of these sensitivities may not be linear.

2  Assumes the impact of a dynamic recalculation of transitionals and an element of dynamic hedging which is performed on a continuous basis to minimise exposure to the interaction of rates with other correlated risks including longevity.

3  Stress reflects a structural change in long-term inflation with an increase of 60bps across the curve.

4  Property stress represents an overall average fall in property values of 12%.

5  Credit stress varies by rating and term and is equivalent to an average 135bps spread widening. It assumes the impact of a dynamic recalculation of transitionals and makes no allowance for the cost of defaults/downgrades.

6  Impact of an immediate full letter downgrade across 20% of the shareholder exposure to the bond portfolio (e.g. from AAA to AA, AA to A, etc). This sensitivity assumes management actions are taken to rebalance the annuity portfolio back to the original average credit rating and makes no allowance for the spread widening which would be associated with a downgrade.

7  Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.

8  Applied to the annuity portfolio.

Unrewarded market risk sensitivities

We have a particularly low appetite to equity, interest rate, inflation and currency risks, which we see as unrewarded, i.e. the return on capital for retaining the risk is lower than for hedging it.

In order to stabilise our SII surplus, we regularly monitor risk exposures and use a range of hedging instruments to remain within a Board approved target range.

Equity risk primarily arises from our exposure to a variation in future management fees on policyholder assets exposed to equities, while our currency exposure primarily arises from our foreign currency denominated debt.

Our interest rate exposure principally relates to our shareholder credit portfolio, while our inflation exposure arises from both cost inflation expectations and inflation-linked policies.

Rewarded credit risk sensitivities

We do however retain the credit risk in our c.£31 billion shareholder credit portfolio, and property risk in Equity Release Mortgages, where we see these risks as rewarded. The shareholder credit assets are primarily used to back the Group's annuity portfolio. Exposure to these risks is needed to back growth in the Group's annuity portfolio. Stress testing is used to inform the level of risk to accept and to monitor exposures against risk appetite.

We also actively manage our portfolio to ensure it remains high quality and diversified, and to maintain our sensitivities within risk appetite. Our BBB exposure is just 19% and we also remain conservative in the sector positioning of our credit portfolio, with only 3% of our credit portfolio exposed to cyclical sectors, with an average rating of A-.

The key sensitivity we focus on for credit is a full letter downgrade of 20% of our credit portfolio, which is £0.3 billion and is therefore small relative to the Group's £4.4 billion Solvency II surplus.

Demographic risk sensitivities

We also have two key demographic risks that we manage. Lapse risk arises from customers surrendering policies early or keeping policies with valuable guarantees for longer.

Our longevity risk principally arises from our annuity book, but this is managed through reinsurance, where we retain around half of the risk across our current in-force book, and reinsure most of this risk on new business.

Life Company Free Surplus

Life Company Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their Board-approved capital management policies. It is this Free Surplus from which the life companies remit cash to Group. We retain a significant Life Company Free Surplus of £2.3 billion which provides resilience to the Group's long-term cash generation. The table shown analyses the movements in 2022.

Growth

Incremental new business long-term cash generation reflects the impact on the Group's future cash generation arising as a result of new business transacted in the year. It is stated on an undiscounted basis.

Assets under administration ('AUA') provide an indication of the potential earnings capability of the Group arising from its insurance and investment business, whilst AUA flows provide a measure of the Group's success in achieving growth from new business.

A reconciliation from the Group's IFRS statement of consolidated financial position to the Group's AUA is provided on page 309.

Please see the APM section on page 314 for further details of these measures.

Incremental new business long-term cash generation

We have delivered a record level of incremental new business long-term cash generation of £1,233 million in 2022 (2021: £1,184 million).

This means that we have once again delivered new business growth which allows us to more than offset the natural run-off of the in-force business cash generation of c.£800 million, demonstrating that Phoenix is a business that is growing organically.

Retirement Solutions

We have written £4.8 billion of BPA premiums in 2022. While this is a reduction on £5.6 billion written in 2021, we have maintained broadly the same level of incremental new business cash generation at £934 million (2021: £950 million) with 20% less capital invested. This in turn supported an increase in the cash multiple from 2.6x in 2021 to 3.4x in 2022.

We successfully reduced our capital strain from 6.5% in 2021 to 5.8% in 2022, and maintained our pricing discipline which is evidenced by our delivery of an increased mid-teens IRR and shorter payback of 5.8 years (2021: 8.6 years).

Importantly though, we are not growing in BPA at the expense of our resilience, with a balanced portfolio and low credit risk sensitivity remaining our long-term ambition here.

Fee-based businesses

This comprises our capital-light fee-based businesses of Pensions & Savings, Europe and SunLife.

Pensions & Savings: Workplace

Our Workplace business has delivered an improved level of incremental long-term cash generation at £212 million in the year, an increase of 53% on 2021 (2021: £139 million). This reflects the increased new business we get from retaining our existing corporate customers, through the natural growth from new members joining existing schemes and the impact of wage inflation on contributions. In addition, as part of TCS Diligenta's build out of our Workplace capabilities we have moved to a lower cost per policy, improving our cost efficiency further. This reduces the expenses accounted for in incremental long-term cash generation and is therefore a recurring benefit for all future new business too.

Pensions & Savings: Retail

The 2022 incremental new business long-term cash generation of £37 million from our Retail business has increased by 28% on 2021 (2021: £29 million). This increase has been driven by the move to a lower cost per policy with TCS Diligenta, as with the Workplace business, thereby enhancing cost efficiency here too.

Europe

There was a small decrease in the incremental new business long-term cash generation of our European business to £29 million (2021: £31 million), due to lower margins on new business in 2022.

SunLife

Our incremental long-term cash generation from SunLife of £21 million has decreased year-on-year (2021: £35 million) reflecting the impact of the cost of living crisis on our SunLife customer base leading to lower sales.

Group AUA

Group AUA as at 31 December 2022 was £259.0 billion (2021: £310.4 billion).

The decrease in the period is largely driven by £45.7 billion of adverse market movements, but importantly there is limited impact from these market movements on the fees we earn, as they are hedged, which results in predictable cash generation.

Heritage net flows

UK Heritage net outflows of £9.6 billion (2021: £10.8 billion1 ) reflect policyholder outflows on claims such as maturities and surrenders, net of total premiums received in the period from in-force contracts.

This improvement year-on-year is due to elevated outflows in 2021 relating to one-off challenges following the migration of L&G business to ReAssure. With these challenges all now resolved, outflows are reflective of a more normalised steady-state run-rate.

Retirement Solutions net flows

Net flows in Retirement Solutions, which encompasses our BPA and individual annuity businesses, were £2.3 billion (2021: £3.3 billion). This year-on-year reduction is due to reduced BPA premiums written, as a result of our improved capital efficiency and the impact of higher rates.

Gross inflows during the period were £5.3 billion (2021: £6.3 billion), inclusive of £4.8 billion of new BPA premiums written in the year. This included 12 external transactions accounting for £4.2 billion of premiums and £0.6 billion for the last tranche of the Pearl Pension Scheme buy-in.

Outflows of £3.0 billion in the period (2021: £2.9 billion) primarily reflect the natural run-off of our in-payment annuity policies.

Pensions & Savings: Workplace net flows

Net fund flows within our Workplace business were £2.4 billion in 2022 (2021: £0.2¹ billion), a significant improvement year-on-year. The investment we have made into our proposition and our Standard Life brand has enabled us to improve the retention of our existing schemes to benefit from the embedded growth in Workplace schemes and drive stronger net fund flows in the year.

Gross inflows were £6.2 billion, up 7% on 2021 (£5.8 billion¹), primarily reflecting increased flows due to annual salary increases.

2022 outflows of £3.8 billion improved on 2021 (£5.6 billion¹), as we retained more customers with our enhanced proposition and the success of our Standard Life Sustainable Multi-Asset default fund.

Pensions & Savings: Retail net flows

Net fund outflows within our Retail business were £1.4 billion in 2022 (2021: £1.6 billion net outflow), a slight improvement year-on-year.

Gross inflows during the period were slightly reduced on 2021 at £1.7 billion (2021: £1.9 billion) due to lower consolidation into our Self Invested Personal Pension ('SIPP') products.

Importantly, we did see a more significant decrease in outflows of 11% to £3.1 billion (2021: £3.5 billion). This demonstrates that more customers are staying with us as our proposition is improving.

Other fee-based businesses net fund flows

We have seen net fund flows of £0.6 billion in 2022 (2021: £0.8 billion net inflows) from our Europe and SunLife businesses.

Gross inflows were £2.5 billion in the year (2021: £2.8 billion), primarily reflecting our individual retirement products sold in Europe, while outflows of £1.9 billion in the year (2021: £2.0 billion) are largely due to the natural run-off of our European business.

Other movements including markets

AUA decreased by £45.7 billion (2021: £11.6 billion increase) driven by the net adverse impacts of market movements, largely due to rising yields. This impact has been seen across the market, but Phoenix is different to other insurers due to our comprehensive hedging approach which mitigates the impact on our Annual Management Charge, to deliver predictable fee-based revenues and underpin our resilient cash generation.

1. The opening AUA position has been restated for a reclassification of £10.1 billon in respect of the Group's Corporate Trustee Investment Plan ('CTIP') from the Heritage business to the Pensions & Savings: Workplace business, as this product is open for new business. Subsequent flows on the CTIP business in 2022 have been captured within the Pensions & Savings: Workplace business, with 2021 associated flows restated to reflect this reclassification and provide a more accurate reflection of year-on-year comparatives.

IFRS results

IFRS (loss)/profit is a GAAP measure of financial performance and is reported in our statutory financial statements on page  168 onwards.

Adjusted operating profit is a non-GAAP financial performance measure based on expected long-term investment returns. It is stated before amortisation and impairment of intangibles, other non-operating items, finance costs and tax.

Please see the APM section on page 314 for further details of this measure.

IFRS profit and loss statement

IFRS loss after tax attributable to owners

The Group generated an IFRS loss after tax attributable to owners of £1,762 million (2021: loss of £709 million), which primarily reflects £2,673 million of adverse investment return variances and £522 million of charges for amortisation and impairment of intangibles.

Investment return variances includes net losses as a result of economic movements in the value of assets backing Group employee pension schemes, where they are subject to insurance policies with Group entities. An accounting mismatch arises as the related decrease in the defined benefit pension obligation is recognised in 'Other Comprehensive Income' ('OCI'), which has seen a gain of £686 million in the period that partly offsets the loss.

Basis of adjusted operating profit

Adjusted operating profit is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudent margins and the interest cost of unwinding the discount on the liabilities).

The principal assumptions underlying the calculation of the long-term investment return are set out in note B2.1 to the IFRS consolidated financial statements.

Adjusted operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Any impact from market movements is shown outside of adjusted operating profit. Adjusted operating profit is net of policyholder finance charges and policyholder tax.

Adjusted operating profit

The Group has reported an increased adjusted operating profit of £1,245 million for the year (2021: £1,230 million).

Heritage adjusted operating profit

Our Heritage business segment does not actively sell new life or pension policies and runs-off gradually over time.

Our Heritage segment delivered adjusted operating profit of £601 million (2021: £537 million), which increased year-on-year. This was primarily due to the non-recurrence of adverse one-off assumption changes recognised in 2021.

Open adjusted operating profit

Open adjusted operating profit includes Retirement Solutions, Pensions and Savings, SunLife, and is shown here inclusive of our Europe business segment.

Our  Open business delivered an adjusted operating profit of £761 million (2021: £788 million). The reduction compared to the prior year primarily reflects lower new business profit on BPA due to a lower level of premiums.

Service company

The adjusted operating loss from the service company of £48 million (2021: loss of £24 million) comprises income from the life and holding companies in accordance with the respective management services agreements less fees related to the outsourcing of services and other operating costs.

The decrease compared to the prior period reflects additional costs incurred, driven by investment in our growth strategy, including the development of asset management capabilities.

Group costs

Group costs in the period were £69 million (2021: £71 million). They mainly comprise project recharges from the service companies and the returns on the scheme surpluses/deficits of the Group staff pension schemes.

Investment return variances and economic assumption changes

Movements in yields, inflation, currency and equity markets are hedged to protect our Solvency II surplus from volatility, but our IFRS balance sheet is, in effect, 'over-hedged'. This is because it does not recognise the additional Solvency II balance sheet items such as certain future profits and the Solvency Capital Requirements (see diagram on page 31). Therefore, the movements in the value of certain hedging instruments offset the market movements in the period, and gives rise to profits or losses in the IFRS results. However, importantly the Group's cash generation and dividend capacity are unaffected by this due to the Group's continued resilient Solvency balance sheet.

As a result, the net adverse investment return variances of £2,673 million (2021: £1,125 million negative) have primarily arisen as a result of rising yields, which has been hedged, and a widening of credit spreads. This includes economic movements on assets within our corporate pension schemes that have been subject to a buy-in. Taking into account the corresponding decrease in our pension scheme liabilities of £940 million, Total Comprehensive Expense for the year was £(1,076)m.

Amortisation and impairment of acquired in-force business and other intangibles

The previously acquired in-force business is being amortised in line with the expected run-off profile of the profits to which it relates. The amortisation and impairment of acquired in-force business during the year of £501 million (2021: £572 million) has decreased year-on-year reflecting the impact of the run-off. Amortisation and impairment of other intangible assets totalled £21 million in the period (2021: £67 million).

Other non-operating items

Other non-operating items totalled a £179 million loss (2021: £65 million loss, inclusive of a £110 million gain on the Standard Life brand acquisition).

This includes £187 million of integration costs related to the strategic decision to re-phase our Standard Life customer & IT migration programme to build out our Open business capabilities on the TCS Diligenta ('TCS') platform. Also included are costs associated with the implementation of IFRS 17, ongoing costs in relation to the ReAssure integration programme, acquisition costs relating to Sun Life of Canada UK, as well as other corporate project costs and other net one-off items.

Finance costs

Finance costs of £199 million (2021: £217 million) reflects the interest paid on the Group debt instruments. The year-on-year reduction reflects the removal of interest on instruments settled in 2021, and therefore no cost incurred this year.

Tax credit attributable to owners

The Group's approach to the management of its tax affairs is set out in its Tax Strategy document that is available on our website.

The Group tax credit for the period attributable to owners is £499 million (2021: £21 million tax charge) based on a loss (after policyholder tax) of £2,261 million (2021: £688 million loss).

The tax credit of £499 million arising on the loss (after policyholder tax) includes a £119 million tax credit arising from the impact of the 25% corporate tax rate effective from 1 April 2023 on deferred tax.

A reconciliation of the tax charge is set out in note C6.4 to the Group financial statements.

Financial leverage

The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. The financial leverage ratio as at 31 December 2022 is 30% (31 December 2021: 28%).

The increase in leverage year-on-year is predominantly a result of the material adverse investment return variance following significant movements in yields and credit spreads. As markets recover in future periods, we would expect to see positive investment variances to unwind some of this unrealised loss. In turn this will result in a reduction in leverage.

The leverage ratio is currently within our target range of 25% to 30%, and we will continue to monitor our leverage and manage it appropriately.

During July 2022, we repaid a £450 million Tier 3 bond from our own cash resources, which contributed to a reduction in outstanding debt leverage to £4.1 billion at the end of 2022.

Our business strategy and financial framework are not impacted by IFRS 17

IFRS 17 is a new Financial Reporting Standard that replaces IFRS 4 on accounting for insurance contracts. IFRS 17 is effective from 1 January 2023.

Our strategy of growing our in-force business over time as we support customers journey to and through retirement remains unaffected. Our key metrics continue to focus on cash generation and Solvency II capital resilience, with our dividend paying capacity and long-term coverage remaining unchanged.

We expect the introduction of IFRS 17 to result in a broadly neutral impact on IFRS shareholder equity, with a Contractual Service Margin ('CSM') of at least £2 billion to be established.

Dividend

Organic growth and M&A supports a sustainable dividend increase

Phoenix has demonstrated a strong dividend track record over the past 12 years, with a 4% compound annual growth rate ('CAGR') since 2011.

2021 was pivotal in evolving our dividend story as, for the first time, our dividend increase came from the strong organic performance of our new business. It was a proof of concept that we could deliver dividend increases outside of M&A.

However, we have always been clear that we are focused on delivering dividend growth both organically through our new business, and through M&A. Which is why I am delighted that in 2022 we have achieved both.

Firstly, we announced our first ever cash funded acquisition of Sun Life of Canada UK, which we expect to complete in April 2023. We said on announcement that the Board had proposed a dividend increase of 2.5% for this inorganic growth, funded from the c.£0.5 billion of cash emerging from this business over its lifetime.

In terms of organic growth, we said we were confident we could deliver new business long-term cash generation to more than offset the natural run-off of our business in 2022, and we have.

With a strong strategic and financial performance in 2022 including record new business long-term cash generation of £1.2 billion, we have delivered organic growth that supports a 2.5% organic dividend increase.

As a result, the Board has recommended a dividend increase of 5% in the Final 2022 dividend to 26.0 pence per share, This equates to a Total 2022 dividend of 50.8 pence per share.

Our increased level of dividend remains just as sustainable as it was previously, thanks to the significant levels of cash generation that will emerge from our current in-force business, with £12.1 billion of Group in-force long-term cash that will be available to fund future dividends.

Dividend policy and approach

We operate a dividend policy which is to pay a dividend that is sustainable and grows over time.

It is important to emphasise that the Board will continue to, above all else, prioritise the sustainability of our dividend over the very long term.

We have now demonstrated that Phoenix can grow both organically and through M&A. Therefore, going forward, we will simplify our dividend communication, with the Board announcing any potential annual dividend increase at our full year results, which will combine both organic growth and inorganic M&A growth.

Outlook

Looking ahead

We are helping people secure a life of possibilities through our clear and differentiated strategy, as we support
our customers on their journey to and through retirement.

The scale of the Group's in-force business brings three key competitive advantages of capital efficiency, customer access and cost efficiency. We will leverage these to grow our in-force cash generation over time, both organically and through M&A.

Clear financial targets

We have a clear set of targets as we continue to prioritise the delivery of cash, resilience and growth.

Starting with cash, Phoenix has set two new cash generation targets. The first is a one-year target range for 2023 of £1.3-to-£1.4 billion. The second is a three-year target of £4.1 billion across 2023-2025, which includes the cash emergence from the new business we expect to write in 2023 and 2024, of c.£0.2 billion.

This evolution in how we set our cash targets demonstrates our confidence in our ability to deliver future organic growth.

In terms of resilience, we will continue to maintain a strong SII surplus through our comprehensive hedging approach. This will see us continue to operate within or above our Solvency II SCCR target range of 140%-to-180% and continue to manage our key individual risk sensitivities on a Solvency II surplus basis.

Despite the difficult ongoing economic backdrop and volatile markets, our uniquely resilient Solvency II balance
sheet is strongly positioned to enable us to deliver on our ambitions in 2023.

In addition, we will look to manage the Group's gearing level by operating within our Fitch financial leverage ratio target our target range of 25%-30% over the long term.

Turning to growth, Phoenix is now confident of growing its incremental new business long-term cash generation, and has set a new target of £1.5 billion per annum by 2025, which is a 25% increase on the Group's strong 2022 performance.

This new target is expected to comprise c.£1.0 billion from Retirement Solutions and c.£0.5 billion from our Fee-based businesses.

In Retirement Solutions, we will continue our strategy of optimising our capital and returns, by investing c.£300 million of capital per annum into BPA and targeting mid-teens IRRs.

While in our Fee-based Pensions and Savings business, we are investing in our proposition and the Standard Life brand, to support our target for growth in our net fund flows. With an ambition for c.£5 billion of annual net fund flows in our Workplace business by 2025 and c.£2 billion in our Retail business by 2025.

Delivering these new growth targets will enable the Group to generate significant net growth in our £12.1 billion of Group in-force long-term free cash, which can support a dividend that is sustainable and grows over time, in line with our policy.

I look forward to an exciting year in 2023 as we continue to deliver on our purpose and our strategy.

Rakesh Thakrar

Group Chief Financial Officer

Principal risks and uncertainties facing the Group

The Group's principal risks and uncertainties are detailed in this section, together with their potential impact, mitigating actions in place and any change in risk exposure since the Group's 2021 Annual Report and Accounts, published in March 2022.

A principal risk is a risk or combination of risks that can seriously affect the performance, future prospects or reputation of the Group, including risks that would threaten its business model, future performance, solvency or liquidity. The Board Risk Committee has carried out a robust assessment of principal risks and emerging risks. As a result of this review, the 13 risks noted in the Group's 2021 Annual Report and Accounts have been retained. The description of one risk has been refined to reflect the evolution of the Group's strategic priorities to focus on organic growth.

Further details of the Group's exposure to financial and insurance risks and how these are managed are provided in note E6 and F4 to the IFRS consolidated financial statements.

Strategic priorities

1 Optimise our in-force business

2 Grow organically and through M&A

3 Enhance our operating model and culture

Emerging risks and opportunities

The Group's senior management and Board take emerging risks and opportunities into account when considering potential outcomes. This determines if appropriate management actions are in place to manage the risk or take advantage of the opportunity. Two examples of key risks and opportunities discussed by senior management and the Board during 2022 are:

Statement of Directors' responsibilities

Statement of Directors' responsibilities in respect of the Annual Report and Accounts of Phoenix Group Holdings plc

The Directors are responsible for preparing the Annual Report, consolidated financial statements and the Company financial statements in accordance with applicable United Kingdom law and regulations.

The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group's business for the year ended 31 December 2022, covers the future developments in the business of Phoenix Group Holdings plc and its consolidated subsidiaries and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the 'Management Report' can be found in the Strategic Report and this Directors' Report, including the sections of the Annual Report and Accounts incorporated by reference.

Company law requires the Directors to prepare the consolidated and the Company financial statements for each financial year. Under that law the Directors have elected to prepare the consolidated and Company financial statements in accordance with UK-adopted international accounting standards ('IASs') in conformity with the requirements of the Companies Act 2006. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.

In preparing these financial statements the Directors are required to:

select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

make judgements and accounting estimates that are reasonable and prudent;

present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

provide additional disclosures when compliance with the specific requirements in IASs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group and Company financial position and financial performance;

in respect of the consolidated financial statements, state whether UK-adopted international accounting standards have been followed, subject to any material departures disclosed and explained in the consolidated financial statements;

in respect of the Company financial statements, state whether UK-adopted international accounting standards, have been followed, subject to any material departures disclosed and explained in the financial statements; and

prepare the consolidated and the Company financial statements on the going concern basis unless it is inappropriate to presume that the Company and/or the Group will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's and Group's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group, and enable them to ensure that the Company and the consolidated financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for making, and continuing to make, the Company's Annual Report and Accounts available on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors as at the date of this Directors' Report, whose names and functions are listed in the Board of Directors section on pages 74 to 76, confirm that, to the best of their knowledge:

the consolidated financial statements, prepared in accordance with UK-adopted international accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and undertakings included in the consolidation taken as a whole;

the Annual Report, including the Strategic Report, includes a fair review of the development and performance of the business and the position of the company and undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

they consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for users (who have a reasonable knowledge of business and economic activities) to assess the Company's position, performance, business model and strategy.

The Strategic Report and the Directors' Report were approved by the Board of Directors on 10 March 2023.

By order of the Board

Andy Briggs                          Rakesh Thakrar

Group Chief                          Group Chief
Executive Officer                 Financial Officer

10 March 2023

Financials

Consolidated income statement

For the year ended 31 December 2022

Statement of comprehensive income

For the year ended 31 December 2022

Statement of consolidated financial position

As at 31 December 2022

Approved by the Board on 10 March 2023.

Andy Briggs                                                                                  Rakesh Thakrar

Chief Executive Officer                                                                 Chief Financial Officer

Company registration number 11606773.